The Hernandez Company is decentralized, and divisions are considered investment centers. Hernandez has one division that manufactures oak upholstered seat cushions. The Chair Division cuts dining room chairs with assembles, and finishes e oak chairs and then purchases and attaches the seat cushions. The Chair Divisionthcurrently purchases the cushions for $32 from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells 1,800 chairs per quarter, and the Cushion Division is operating at capacity, which is 1,800 cushions per quarter. The two divisions report the following information:

Requirements :

1. Determine the total contribution margin for Hernandez Company for the quarter.

2. Assume the Chair Division purchases the 1,800 cushions needed from the Cushion Division at its current sales price. What is the total contribution margin for the division and the company?

3. Assume the Chair Division purchases the 1,800 cushions needed from the Cushion Division at its current variable cost. What is the total contribution margin for each division and the company?

4. Review your answers for Requirements 1, 2, and 3. What is the best option for the company

5. Assume the Cushion Division has a capacity of 3,600 cushions per quarter and can Hernandez Company? continue to supply its outside customers with 1,800 cushions per quarter and also supply the Chair Division with 1,800 cushions per quarter. What transfer price set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.

Chair Division Cushion Division $ 34 12 Sales Price per Chair Variable Cost (other than cushion) Variable Cost (cushion) Contribution Margin per Chair $95 Sales Price per Cushion 56 Variable Cost per Cushion 32 $ 7 Contribution Margin per Cushion $ 22